Proxy Statements Research Articles

Voluntary Performance Disclosures in the CD&A

This paper examines how firms use voluntary disclosures in response to information asymmetries between firms and shareholders surrounding the design and approval of executive compensation. Prior research finds that firm performance is a primary determinant of pay and negative shareholder response to pay is largely influenced by recent performance. We find evidence that firms voluntarily increase discussion of their performance in the Compensation Discussion and Analysis (CD&A) section of the annual proxy statement when shareholder scrutiny is high, i.e., when compensation levels are high relative to peers and performance. This relation strengthens after Say-on-Pay, when shareholder scrutiny arguably increased for all firms. These voluntary performance disclosures are associated with higher shareholder approval and more positive proxy advisor recommendations, as well as higher relative compensation in the subsequent year. Altogether, our findings suggest CD&A performance disclosures allow firms to communicate the context of their compensation choices in order to mitigate negative shareholder scrutiny.

Hidden Agendas in Shareholder Voting

Nothing in either corporate or securities law requires companies to notify investors what they will be voting on before the record date for the meeting. We show that, overwhelmingly, they do not. The result is “hidden agendas:” in 88% of shareholder votes, investors cannot find out what they will be voting on before the record date. This poses an especially serious problem for investors who engage in securities lending: they must decide whether the expected benefit of voting exceeds the expected benefit of continuing to lend their shares (or making them available for lending) without knowing what they will be voting on. All investors who engage in share lending are affected, but the problem is particularly acute for large investment managers that have fiduciary duties related to voting. At present, they must discharge these duties in the dark. We propose a straightforward solution: an amendment to the Securities and Exchange Commission’s proxy rules requiring public companies to file proxy statements at least five days before the record date for the meeting. This simple change would give investors the information they need to make an informed decision about whether to retain the right to vote or not. If we believe that shareholder voting is important, and that investment managers and others should decide whether to vote, we should give them the information they need to do so.

Does the use of non‐GAAP earnings in compensation contracts lead to excessive CEO compensation? Efficient contracting versus managerial power

AbstractWe examine whether the recent trend of firms’ using non‐GAAP earnings metrics in compensation contracts is consistent with the efficient contracting hypothesis or the managerial power hypothesis. We extract non‐GAAP performance metrics from compensation contracts in proxy statements of S&P 500 firms from 2006 to 2013. We find that the adoption of non‐GAAP earnings in CEOs’ compensation contracts is positively associated with CEOs’ cash compensation. However, the increase in CEOs’ compensation is primarily evident among firms with superior CEO talent. In addition, we find that the cash pay‐performance sensitivity (PPS) increases after the adoption of non‐GAAP performance measures, suggesting that boards use non‐GAAP performance measures to enhance CEOs’ performance‐improving incentives, rather than granting excessive compensation. Overall, our evidence suggests that, on average, the use of non‐GAAP performance metrics in executive compensation contracts reflects boards’ efforts to retain talented CEOs and mitigate agency problems, which is consistent with the efficient contracting hypothesis.

SEC Rule 14a-8 Shareholder Proposals: No-Action Requests, Determinants, and the Role of SEC Staff

Under SEC Rule 14a-8, shareholders have the right to petition management to include a topic for vote on the annual proxy statement. In response, management may request no-action relief from the Securities and Exchange Commission (SEC) staff to exclude unwelcome proposals. Using a sample of 2,972 no-action letter responses from the SEC between 2008 and 2019, I examine the determinants of the SEC staff’s decision to grant no-action relief. I find the legal characteristics, pressures on the SEC staff, and proposal attributes have a statistically significant association with the SEC’s decision. Beyond these factors, I find evidence individual SEC staff members differ in the likelihood they grant no-action relief, suggesting heterogeneity among SEC staff characteristics is important for understanding no-action relief decisions.

Are controlled companies underperforming?

Research Question: Are controlled companies underperforming in the United States? Motivation: Anecdotal evidence shows that the average market capitalization of controlled firms increased from $8.3 billion in 2005 to $20.6 billion in 2015. Given the rapid increase in capitalization, the group of controlled companies has become an important player in the US capital market. However, little is known about controlled companies. Idea: We examine whether controlled companies are underperforming relative to non-controlled companies in the United States. Data: The data sample consists of 351 listed companies in the United States for the fiscal year 2014. Tools: 176 controlled companies were manually collected by performing the keyword search “controlled company” from the U.S. Securities and Exchange Commissions (SEC) website via “www.seekedgar.com/”. Specifically, we search “controlled company” from proxy statement DEF 14A. Each controlled company is verified after reading through the proxy statement. Findings: Using 176 controlled companies and 176 random sampled non-controlled companies, we find that controlled companies are underperforming compared to non-controlled companies. Contribution: To the best of our knowledge, we are the first to collect the group of controlled companies in the US and we are among the first to study how firm performs under the type II agency problem (Pantzalis et al. 1998). We contribute to the stream of literature on how ownership structure (e.g., family-controlled firms) affects firm performance (Anderson & Reeb, 2003). Consistent with the findings from family-controlled firms, we show that ownership structure affects firm performance. Out study sheds light on the important role of controlled companies in the US capital market.

Come i CEOs rispondono alla crisi: un'analisi comparativa delle strategie retoriche durante la pandemia da Coronavirus

L'esplosione di una crisi aziendale esogena impone il consolidamento della fiducia di stakeholder sempre più scettici, delusi o insoddisfatti. Il lavoro analizza come le strategie retoriche dei CEO nei settori più colpiti dalla pandemia da Covid19 sono improvvisamente cambiate ad inizio del 2020. La diffusione mondiale del virus ha costretto le imprese di questi settori (trasporto aereo e ferroviario, servizi di ristorazione e di ricezione turistica) a incorrere in costi inaspettati e un rapido deterioramento dei profitti, così da aumentare le preoccupazioni degli stakeholder. Utilizzando le lettere dei CEO agli shareholders, contenute nei proxy statements del 2019 e del 2020, è stata realizzata una content analysis delle strategie retoriche adottate da queste imprese per fronteggiare la crisi globale derivata dalla pandemia. L'analisi mostra che le lettere agli azionisti che fanno riferimento diretto al virus tendono ad avere un indice di sentiment più basso e un indice di supportiveness più alto rispetto alle lettere nelle quali non viene menzionato il tema del virus. Lo studio offre spunti per i CEO su come comunicare un cambiamento inaspettato delle prospettive di crescita.

Executive Accountants and the Reliability of Financial Reporting

Using hand-collected data from mandatory disclosures of executive officers, we examine financial reporting outcomes associated with delegating significant accounting responsibilities to an executive accountant, not concurrently serving as the chief financial officer or chief executive officer. We find executive accountants are associated with a significant reduction in the likelihood of restatement. Moreover, we find evidence of a positive association between executive accountants and accrual quality and faster remediation of material weaknesses in internal control when an executive accountant is present. Taken together, this evidence is consistent with more reliable financial reporting at firms with an executive accountant. In contrast, accountants identified in commonly used datasets (i.e., Execucomp or BoardEx) are not consistently associated with the reliability of financial reporting. We highlight the significant differences between datasets, largely attributable to the objectives and sources of the underlying data. We conclude that Execucomp and BoardEx are not substitute datasets for the executive officers disclosed in firms’ 10-K and proxy statement filings. Furthermore, we caution future research to consider which data are most appropriate in the context of each research question. This paper was accepted by Shiva Rajgopal, accounting.

Philip Morris International Integrated Report 2019: Analyzing the Content

On June 30, 2020, Philip Morris International, Inc. (PMI). announced the publication of their first integrated report. The press release read in part, “This year, we’ve evolved our traditional sustainability reporting into an integrated overview. In doing so, we’re providing a comprehensive outline of how PMI’s strategy, governance, and performance is delivering value over the short, medium, and long term.” This statement, in combination with the inclusion of a corporate statement of purpose (originally published in the company’s 2020 Proxy Statement), begged for a critical examination of the quality of the PMI integrated report. A hybrid integrated reporting framework was created as a benchmark against which the PMI integrated report was evaluated. The author concluded that the quality of PMI’s integrated report ranked as high as that of the best reports published by companies in Germany, the Netherlands, and South Africa. PMI’s integrated report challenges often expressed concerns about the perceived risks of litigation that might arise from the forward-looking nature of an integrated report. Finally, the PMI report demonstrated that a high level of board and management support is required to produce a high quality integrated report.

Executive Incentive Pay Disclosures at Etsy, Inc.

The financially savvy (fictional) protagonist in this case is an independent artist, intrigued with the possibility of becoming a seller on the Etsy, Inc., marketplace. As such, she is seeking to learn about the company—that is, its culture, recent history, and incentive compensation philosophy and practices for top executives. The case provides pertinent, publicly sourced information for exploring and discussing such issues.This case is suitable for an undergraduate, graduate, or non-degree executive education course where the focal topic is, in general, performance management, and more specifically, the use and design of executive incentive compensation plans. A valuable secondary objective is to introduce students to some of the company information disclosed in a publicly available corporate proxy statement. That document, filed with the SEC as Form DEF 14A, is filed in preparation for a public company's annual shareholder meeting. Excerpt UVA-C-2430 Dec. 6, 2019 Executive Incentive Pay Disclosures at Etsy, Inc. Betsy Jordaniske had been an artist for as long as she could recall. In fact, in fourth grade, she had won the first art contest she had ever entered. What was unique and unusual about her winning piece, and what was still true 20 years later, was that her paintings were three-dimensional, incorporating real materials from nature such as dried grasses, pebbles, twigs, grains, and even a little dirt once in a while. Such materials interplayed with the acrylics, the chalk, and the colored pencils she used in a truly captivating way. Her paintings were unique to say the least, and they often prompted observers to move closer, look longer, and reflexively smile just a little bit. For years, Jordaniske had been frustrated by not having enough time to devote to her art—she lived for that endeavor, and she worked as a bookkeeper to live. On the surface, her occupation and vocation seemed quite incongruous, but it was the symmetry of bookkeeping that had a certain appeal to her, just as the unlimited possibilities of a blank canvass never failed to kick-start the flow of artistic ideas in her head and heart. Formal schooling in accounting or art had not been a path Jordaniske had been able to take. Out of family necessity, she had gone to work right out of high school in her uncle's retail shop, doing the books in the back office, working the cash register out front, and helping customers when the shop got busy. It was in the evenings and on weekends, when the weather was nice, that she set up her portable, bare-bones studio in various natural, out-of-the-way settings around her Texas hometown. She let her surroundings speak to her—waiting to sense the urge to paint a certain scene, in a certain way. Inevitably, ideas easily and readily flowed. If she did not have all the material she needed while on site, she would simply add it later, with no loss of artistic wholeness, as the image she wanted was already finished in her mind's eye. It was this duality of her essence—the practical, yet artistic, enjoyment of a finite/prescribed bookkeeping system, as well as the unfettered possibilities/expressions of an artist's imagination—behind her decision to look into the Etsy, Inc., marketplace possibility. . . .

Agency cost of CEO perquisites in bank loan contracts

This study investigates the association between CEO perquisites and bank loan spreads. We collect detailed data on CEO perquisites from the proxy statements of S&P 500 firms between 1993 and 2015 to study this issue. The empirical evidence supports the agency cost view that the lending banks demand significantly higher returns (spread), more collateral, and stricter covenants from firms with higher CEO perquisites. We further confirm that the effect of these perquisites remains after we control for various corporate governance and agency cost factors. We conclude that banks consider CEO perquisites as a type of agency cost when they make lending decisions.

Board Risk Oversight and Corporate Tax-Planning Practices

ABSTRACTRisk oversight by the board of directors is a key component of a firm's enterprise risk management framework, and recently, boards have paid more attention to their firm's tax-planning activities. In this study, we use a hand-collected sample of proxy statement disclosures about the board's role in risk oversight and provide evidence that risk oversight is negatively associated with both tax uncertainty and overall tax burdens. We find that risk oversight is most strongly associated with positions that yield permanent tax benefits and also with less risky tax-planning activities. Overall, the evidence suggests that board risk oversight is associated with more effective tax-planning practices.

The Strategic Drivers of Proactive Investor Attention

Publicly-listed companies increasingly face pressures from the public equity market. Recently these market pressures have arisen from activist hedge funds who buy blocks of shares in a firm’s stock with the intent to intervene in the firm’s management. Despite the growing presence of activist investors, the nature of strategies that garner attention from these investors is not well known. This study uses the theoretical lens of a lemons problem in strategies, arising from information asymmetry and adverse selection issues in public equity markets, to argue that as companies’ strategies are incongruent with the expectations of market participants and therefore more difficult to understand, they are prone to public market dissent and likely to garner more attention from investors seeking involvement in management. Using a hand-collected proprietary database of SEC 13D filings and proxy statements, we find that companies’ increasing levels of strategic incongruence tend to be positively associated with attracting proactive investor attention.

Striking Oil in the Boardroom: Overpaying Executives through Manipulating Performance Metrics

Using hand-collected proxy statement data, we examine the distribution of performance metrics used to calculate executive compensation in 86 US oil and gas firms. We find that the distribution of actual–target differences is significantly discontinuous at zero over the 13-year period 2006-2018. Executives are nearly three times more likely to just beat than to just miss their performance targets. When we split metrics into transparent and non-transparent measures, we find significant discontinuities only in the non-transparent group, which persist even after 2011, when the US Securities and Exchange Commission (SEC) updated its disclosure guidance for non-GAAP performance metrics in proxy statements. The discontinuities also disappear when firms are financially distressed or have better governance. Our findings suggest that managers can routinely manipulate realized performance metrics to increase their performance-based compensation. Our framework can help analysts and investors in their firm governance assessments and the SEC in its redesign and enforcement of disclosure rules for non-transparent realized performance metrics.

Environmental, social and governance reporting in annual reports: A textual analysis

AbstractConsidering environmental, social, and governance (ESG) factors becomes increasingly important for companies and investors. However, “ESG” is not clearly defined so far and, therefore, it is difficult to measure the ESG activity of companies. We analyze the extent and changes in 10‐K reports and proxy statements on ESG, using a textual analysis and creating an ESG dictionary. The results show an average of 4.0 % ESG words on total words in the reports. The ESG word list with 482 items can be used to quantitatively examine the extent of ESG reporting, which will be helpful especially for SRI investors. Our classification of 40 subcategories allows a highly granular analysis of different ESG related aspects. Moreover, indications for a relation between changes in reporting and real events, especially negative media presence, are detected. Regulatory bodies have to be aware of the use of such words and how they are used.

Fairness is in the Eye of the Investor: CEO Pay Ratio Voluntary Disclosures and Investor Reactions

Since 2018, the Security and Exchange Commission (SEC) has required firms to disclose the ratio of their Chief Executive Officer's (CEO's) and median employee’s pay. Due to the uncertainty surrounding the ratio's interpretation, some managers use voluntary disclosures to complement and clarify their mandatory disclosures. We document this behavior by manually inspecting the proxy statements of all firms in the S&P 1500. We predict and find that a firm's propensity to provide voluntary disclosures increases in the magnitude of its pay ratio. Drawing on equity and signaling theory, we predict that investor reactions will be significantly more impacted by the voluntary disclosure behavior of firms whose pay ratios are in the middle of the distribution. Investors rely more on the voluntary disclosures of middle ratio firms because the magnitude of their ratio provides an ambiguous signal of pay fairness, relative to low or high ratios. We find empirical support for this prediction, and we find that investor responses are strongest among firms with high institutional ownership, which we attribute in part to the demands of institutional investors for increased human capital management disclosures.

How do job vacancy rates predict firm performance? A web crawling massive data perspective

Traditionally, the relationship between a firm's performance and its business strategy is studied using structured data taken from proxy statements and financial reports. However, there have been increasing efforts to explore the linkages between corporate outcomes and unstructured information, such as text or image/audio/video files. Until recently, semi-structured data had been largely overlooked. Given that a substantial amount of such data can be extracted using web crawler techniques and then processed using big data solutions, the current study employed this procedure to investigate whether dynamic job vacancy postings by Taiwanese publicly listed companies are associated with subsequent stock returns and operating ratios. We report that new job openings foreshadow a firm's operating performance, both indirectly, by boosting stock prices, and directly, by signaling positive developments. This finding remains robust to tests addressing endogeneity concerns and the adoption of alternative specifications. We thus shed light on the role of metadata in financial analysis.

Operating Cash Flows and Earnings Target Revision

We examine the extent to which current operating cash flows are incorporated in future earnings targets in executive compensation. Using target and actual compensation earnings per share (EPS) disclosed in proxy statements for large U.S. public companies, we find that revision of the following year’s EPS target is unrelated to current operating cash flows. Because of the positive association of operating cash flows with future earnings incremental to current earnings, failing to incorporate operating cash flows in target revision results in more achievable earnings targets for firms with higher operating cash flows. Interestingly, we find that the positive relationship between target achievability and operating cash flows is attributable to both expectation bias related to operating cash flows and contractual considerations designed to reward CEOs who deliver greater cash flows and to limit activities that sacrifice cash flows.

The Impact of Mandatory Auditor Tenure Disclosures on Ratification Voting, Auditor Dismissal, and Audit Pricing

Recent amendments to Auditing Standard (AS) 3101 require disclosure of the initial year of the auditor-client relationship in the audit report. As the standard was being discussed, auditors, clients, and some PCAOB members expressed reservations about the necessity of tenure disclosures and were particularly concerned about disclosing tenure in the audit report. Our purpose is to investigate whether the tenure disclosures mandated by AS 3101 are associated with changes in stakeholder behavior. We predict and find that after the implementation date, ratification votes against the auditor and the probability of subsequent auditor dismissal increase for long-tenured versus short-tenured auditors. Results from a path analysis further suggest that the relative increase in dismissal for long-tenured auditors appears to be influenced directly through tenure disclosures and indirectly through ratification voting. We also predict and find that negotiating power decreases for long-tenured auditors as evidenced by lower audit fees. Our results are comparable for companies that voluntarily disclosed and companies that did not disclose auditor tenure in their proxy statements prior to the AS 3101 amendment. Overall, our study suggests that mandatory disclosure of auditor tenure in the audit report significantly affects stakeholder behavior. The PCAOB should consider our findings carefully as they evaluate whether AS 3101 is achieving its intended purpose.

Are Earnings Forecasts Informed by Proxy Statement Compensation Disclosures?

ABSTRACTWe investigate the extent to which market participants use compensation payouts released in the DEF 14A proxy statement (DEF14A) to assess future firm performance by examining sell‐side analysts' earnings forecasts. Consistent with prior work, we confirm that CEO compensation unexplained by current observable economic factors is positively associated with future firm performance. We find that both the likelihood that analysts revise their forecasts following release of the DEF14A and the magnitude and direction of analysts' forecast revisions are positively associated with unexplained CEO compensation. These associations are stronger after the SEC required additional compensation‐related disclosures in late 2006 but lower if the firm has weak corporate governance or more precise other information. Analysts' reactions are not complete, however. Analysts' forecast errors measured months after the DEF14A release are associated with past unexplained compensation, especially in the pre‐2006 period and for analysts who do not revise at the DEF14A release. Taken together, our results suggest that compensation payouts released in the DEF14A contain useful forward‐looking information that is recognized by at least some sophisticated market participants and that the increased disclosure regulations assisted market participants in incorporating this information.

Board committee overlap and the use of earnings in CEO compensation contracts

Using proxy statement data describing the terms of compensation contracts, we examine how overlapping membership between compensation and audit committees influences the use of earnings metrics in compensation. While research predicts that such overlap could either increase or decrease the reliance on earnings, we find that firms with overlapping directors rely less on earnings-based performance measures in incentive contracts without altering the overall level of performance-contingent cash bonuses. In addition, we provide evidence that firms substitute earnings measures with measures less subject to earnings management. Our findings are robust to potential alternative explanations, extend to an implicit relation between earnings and compensation for a larger sample, and are not driven by the tendency towards an overlapping committee structure more broadly.